Learning (Not) to Trade: Lindy's Law in Retail Traders

44 Pages Posted: 4 Dec 2020 Last revised: 7 Dec 2020

See all articles by Teodor Godina

Teodor Godina

affiliation not provided to SSRN

Serge Kassibrakis

Swissquote Bank

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students

Jiahua Xu

University College London - Department of Computer Science; Ecole Polytechnique Fédérale de Lausanne

Date Written: November 17, 2020

Abstract

We develop a rational model of trading behavior in which the agents gradually learn about their ability to trade, and exit after poor trading performance. We demonstrate that it is optimal for experienced traders to "procrastinate" and postpone exit even after bad results. We embed this "optimal procrastination" in a model of population dynamics with entry and endogenous exit, and generate predictions about the dynamics of various cross-sectional characteristics. We test these population-level predictions using a large client data set of a major Swiss retail broker. Consistent with the model, we find that endogenous exit decisions produce non-trivial and non-monotonic population-wide linkages between performance, exits, and trading experience.

Keywords: Trading, Investor behavior, Learning, Rationality

JEL Classification: D10, G10

Suggested Citation

Godina, Teodor and Kassibrakis, Serge and Malamud, Semyon and Teguia, Alberto and Xu, Jiahua, Learning (Not) to Trade: Lindy's Law in Retail Traders (November 17, 2020). Swiss Finance Institute Research Paper No. 20-100, Available at SSRN: https://ssrn.com/abstract=3732319 or http://dx.doi.org/10.2139/ssrn.3732319

Teodor Godina

affiliation not provided to SSRN

Serge Kassibrakis

Swissquote Bank ( email )

Ch. de la Crétaux 33
Gland, Vaud 1196
Switzerland

Semyon Malamud

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

Jiahua Xu (Contact Author)

University College London - Department of Computer Science ( email )

United Kingdom

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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